Global risk sentiment took a hit this week as US stock markets nose-dived towards the end of the week. Following a strong run since mid-May, US stocks were prone for a correction and it seemed the cocktail of geopolitical risks and a hawkish shift in Fed rhetoric became the trigger of profit taking and investors taking risk off the table.
However, we still believe risk assets will outperform on a six to 12 months horizon. The global recovery is taking hold and we look for 4%-plus global growth in H2. The risk factors currently in play are not large enough to push the recovery off course in our view. Also, even though we now look for the Fed to raise rates in April next year instead of June, the normalisation of policy is likely to happen very gradually and global rates and yields are likely to stay very low for a long time.
We should expect volatility in risk assets to pick up though, as the Fed switches off autopilot and US inflation becomes a factor to consider for financial markets as slack in the economy is coming down.
Global recovery strengthening further
The data flow over the summer has generally confirmed the story of reacceleration driven by the US and China with the euro area lagging a bit.
1. US GDP growth recovered to 4.0% in Q2 after falling 2.1% in Q1 and, importantly, data on US consumer shows that momentum in consumer spending was intact going into Q3. Initial jobless claims and business surveys for manufacturing and service have also stayed upbeat.
2. In China, PMI data has climbed further, pointing to growth of around 8% in H2. Credit growth and real M2 data support the picture of strengthening growth. PMIs in most of Asia have also climbed higher, supporting the case for stronger Asian growth.
3. The euro area has seen some softening in surveys over the past few months, which we believe is a lagged effect of the weakness in the US and China in early 2014 and the strong euro at that point. Both factors have turned though and we look for activity to recover in H2. The past week also provided good news on the credit side, as the ECB’s lending survey showed easing of credit standards in all sectors for the first time since 2007 (see Flash Comment: Euro banks ease lending standards for all sectors for first time since 2007, 30 July). The missing link in the euro recovery may finally kick in soon and we look for credit growth to recover going into 2015. The main risk is a further escalation of the stand-off with Russia.
4. Japan is currently the weak link in the global economy still feeling the negative effects of the VAT hike in April. Industrial production fell sharply in June and retail sales and exports also disappointed recently. Some surveys point to improvement in coming months though, so it is still a bit early to make a final verdict on how lasting the effects of the VAT hike will be.
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